1. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill 10-1 C HAPTER 10 Personal Finance Home and Automobile Insurance Kapoor Dlabay Hughes 6e

2. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Insurance and Risk Management Insurance is protection against possible financial loss. An insurance company, or insurer, is a risk- sharing firm that assumes financial responsibility for losses from an insured risk. People purchase a policy and the firm assumes a risk for a fee called the premium which the insured policyholder pays periodically. 10-2

3. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Types of Risk Risk is uncertainty or lack of predictability, such as to loss that a person or property faces. Peril is the causes of a possible loss, such as fire, windstorms, robbery, disease or death. Hazard is something that increases the likelihood of a loss, such as driving drunk, smoking in bed, or defective house wiring. Risk management is a long range, organized, planned strategy to protect your assets and family. 10-3

4. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Risk Avoidance Risk Shifting Risk Assumption Risk Reduction Ways to Manage Risk 10-4

5. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Coverage and Type of Risk Pure Risk.  Insurable.  Accidental, unintentional.  Nature and financial loss of the risk can be predicted.  Can be personal, property. or liability risk. Speculative Risk.  Chance of loss or gain.  Uninsurable.  Such as starting a small business or gambling. 10-5

6. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Examples of Risks You Face Disability. Illness. Death. Retirement. Property loss.  Physical damage.  Loss of use. Liability.  You are legally responsible for another person’s losses or injuries. 10-6

7. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Negligence vs. Vicarious Liability Negligence.  Failure to take ordinary and reasonable care. Such as failure to remove items from a frequently used staircase. Vicarious Liability.  When you are held responsible for the actions of another person.  Such as your child throwing a ball through a neighbor’s window. 10-7

8. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Planning an Insurance Program Set your insurance goals and prioritize them. Develop a plan to reach your goals. Put your plan into action. Review your results. To put your risk management plan to work ask yourself…  What should be insured?  For how much?  What kind of insurance?  From whom? 10-8

9. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Homeowner’s Insurance Coverages Homeowners insurance is coverage for a place of residence and its associated financial risks.  Buildings and other structures, plus trees, shrubs and plants.  Additional living expenses.  Personal property.  Personal property floater.  Household inventory.  Endorsement for specialized coverages.  Medical payments for minor injuries on your property.  Personal liability. 10-9

10. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Umbrella Policy Also called a personal catastrophe policy. Supplements basic personal liability coverage. $1,000,000 or more in liability coverage. 10-10

11. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Items Covered by Renter’s Insurance Personal property loss or damage. Personal liability. Additional living expenses. A landlord’s insurance usually won’t cover personal belongings. Only 40% of renters have renter’s Insurance. 10-11

12. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Home Insurance Policy Forms Basic form (HO-1) Broad form (HO-2) Special form (HO-3) Tenant’s form (HO-4) Condominium form (HO-6) Modified coverage form (HO-8) In addition to the above other items are covered such as credit card fraud, check forgery, temporary repairs and fire department charges in areas with such fees. 10-12

13. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill How Much Coverage Do You Need? Look for a policy with full coverage rather than a coinsurance clause. What would it cost to replace your home? Have sufficient liability coverage. Include protection for specific items such as collections, cameras, and jewelry. Determine the value of the contents of your home.  Actual cash value - cost less depreciation.  Replacement cost - repair or replace with new item. 10-13

14. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Factors That Affect Home Insurance Costs Location of residence. Type and age of the structure. Amount of coverage and deductibles. Discounts - alarm system, smoke detector, if you insure your car with the same company. Company differences.  Compare costs and coverages at sites such as www.insuremarket.com  Customer satisfaction information is available at www.consumerreports.org 10-14

15. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Automobile Insurance Coverages Financial responsibility law.  40 states have compulsory automobile insurance laws.  see Exhibit 10-8 to see the minimum limits in your state. Requires drivers to prove their ability to cover the cost of damage or injury caused by an automobile accident. 10-15

16. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Motor Vehicle Liability Coverage 10-16 bodily injury liability property damage liability

17. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Motor Vehicle Insurance Coverages (continued) Bodily injury coverages  Bodily injury liability covers the risk of financial loss due to legal expenses, medical expenses, lost wages and other expenses associated with injuries caused by an accident for which you were responsible.  Medical payments covers the cost of health care for persons injured in your automobile, including yourself. 10-17

18. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Motor Vehicle Insurance Coverages (continued) Property damage liability covers damage to others person’s car when you are at fault. It also includes damage to such things as street signs and buildings.  For example, during a snow storm you might accidentally slide your vehicle into a neighbor’s mailbox or tree. 10-18        

19. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Auto Insurance Coverages Uninsured motorist.  Pays for the cost of injuries if your vehicle is hit by a person without insurance. However, it does not cover property damages. Underinsured motorist  Pays costs if your car is hit by a person who doesn’t have enough insurance to cover the damage they did to you and your car. (continued) 10-19

20. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill No-Fault Insurance Each driver collects from their own insurance company.  Medical expenses.  Lost wages.  Related injury costs. Intended to provide fast and smooth methods of paying for damages without taking the legal action frequently necessary to determine fault. Systems vary from state-to-state. 10-20

21. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Collision Coverage When your car is in an accident, collision insurance pays for damage to your automobile, regardless of who is at fault. However, if you are not at fault they will try and collect from the other driver’s property damage liability first. 10-21

22. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Comprehensive Physical Damage Covers damage to your vehicle that is not caused by a collision, such as...  Fire.  Theft.  Vandalism.  Glass breakage.  Hail, sand, or wind storm.  Your car rolls downhill into a tree. 10-22

23. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Amount of Coverage Legal concerns include having enough coverage if you were sued.  $100,000/$300,000 is recommended for bodily injury liability,with an additional $1,000,000 or more umbrella liability policy recommended. Property values of vehicles have gone up.  $50,000-$100,000 is usually suggested for property damage liability. 10-23

24. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Auto Insurance Premium Factors Automobile type.  Year, make and model. Rating territory.  Accident, theft, and vandalism rates in the area where you live. Driver classification.  Age, sex, marital status, credit history, driving record, and driving habits. Assigned risk pool for people who are unable to obtain insurance. 10-24

25. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Reducing Automobile Insurance Premiums Find out how much it will cost to insure a car before you buy it. Compare companies - www.insuremarket.com Have larger deductibles. Look for discounts.  Establish and maintain a good driving record.  Non-smoker.  Install security devices such as a car alarm.  If you have more than one vehicle insure them both with the same company. 10-25